Wednesday, April 5, 2017

Reality Begins to Sink In

Stocks lose this morning's gains to finish lower after the hawkish tone in the FOMC minutes, which also showed that some Fed officials are worried about high equity valuations.

Today, the market had the largest one day reversal since February 2016

Paul Ryan made matters worse by stating that tax reform could take even longer than healthcare

TLT is up over 4% since we targeted a buy level in our previous article

Valuations Are Still Insanely High

Market Outlook

The S&P 500 is at somewhat of a pivot-point that could break either way. We are waiting for a significant break of either trend line indicated on the daily chart below to confirm the direction. The short term momentum is currently down, but this seems to be the bull market that never ended.

The S&P weekly chart below also indicates we are due for a retracement. We expect the move lower to happen if price breaches the 50 day moving average. We are currently targeting a move to 2250-2275. This is mostly reliant on if we break support as well as how quickly we decide to move lower. A slow move down would make the 2275 more probable. Of course, this all depends on a break of the trend line indicated in the daily chart above.

Regardless of which direction price breaks, we remain long term bearish until valuations return to a "normalized" level. History tells us the 10-year annual return on valuations with a P/E above 20 are not good. In fact, some savings accounts almost have better annual returns than equities when valuations are this high. (charts below)

Conclusion

We remain highly cautious in this market. As we wrote in our previous quarterly outlook, there has been a lot bet on President Trump's ability to follow through. As predicted, we are already seeing the effects of some policies not making it through. The failure of Obamacare Lite and now the statement on taxes made by Speaker Ryan are slowly tightening the noose around this long bull market. Lastly, the Fed will most likely continue raising rates as quickly possible as inflation has more than tripled since July of 2016. All this put together, we get ourselves a nasty storm setting up. We remain long TLT as a hedge for the possible (and statistically probable) upcoming turmoil.

Disclosure: We are long TLT.

Disclosure: The information provided in this article is not to be construed as investment advice. Any securities you buy are ultimately your decision. Investing carries risk. Always do your due diligence before buying/selling any security. We are not being compensated for writing this article.